18 September 2008

Can Civil Litigation Expenses Be Controlled?

Lawsuits are expensive. The bigger the lawsuit, the more expensive the lawsuit, generally speaking.

Most of the additional cost of a bigger lawsuit comes from the costs of discovery. In really big cases, discovery can easily account for 90% of litigation costs or more. Even in small cases, discovery is an important part of litigation costs, usually involving at least a third to a half of the expenses even in a small case that settles before trial and/or is resolved in motion practice.

Discovery is the gathering of evidence on a compulsory basis, usually with little court supervision, after a lawsuit is filed and before trial. Discovery can be costly, often unnecessarily so, but is also often necessary so that a party to a lawsuit can discover key evidence of the facts in the case that are controlled by someone else. The basic question is how costs can be minimized while not dismissing more lawsuits that have merit.

Closely intertwined with the discovery problem, indeed, really a facet of it, is the question of how specific litigants should be required to be about their claims when they initially bring suit. Suits that can be dismissed on the basis of a pre-discovery motion to dismiss for failure to state a claim quickly dispose of weak cases, so there is a temptation to require a high level of specificity. But, defendants often have control of key information, so setting high standards may through out suits with merit.

Also, closely related is issue of how easily cases should be resolved prior to trial in motions for summary judgment, in which documentary and affidavit evidence not creating square disputes of material facts are considered by a judge. These motions are typically brought part way through or at the end of the discovery stage of a case.

Traditionally, pre-evidentiary motions to dismiss and motions for summary judgment have been disfavored, in order to preserve the role of a jury in resolving cases as often as possible. But, in practice, these standards have grown more liberal over time. The percentage of cases resolved through motions for summary judgment has increased greatly.

The problem is that if a case is cursed with a disputed issue of fact, even if the evidence is very strong for one side or the other, resolution of the case can be delayed, and expenses can multiply, even if the primary dispute between the parties is a dispute over contract interpretation or questions of law, that are the duty of a judge rather than a jury to decide.

Also, while the vast majority of personal injury cases are on track to being decided by juries if they are not settled, most commercial cases will ultimately be resolved in a bench trial, so postponing judicial decision making until trial often has no solid theoretical basis.

It is also worth noting that civil jury trials are becoming increasingly rare due to high settlement rates and due to increased resolution of cases in motion practice, particularly outside the realm of individual personal injury cases, and that the vast majority of civil cases are tried in state courts where there is no federal constitutional right, and often no state state constitutional right, to a trial by jury.

There is essentially no room in the existing legal system for increased settlement rates alone to reduce litigation costs. Mediation and settlement discussions are almost always mandatory before a case goes to trial. And, a very high percentage of cases (in the view of many observers including myself, too many cases) already settle.

Law professor Paul Stancil, in his article about the desired specificity of legal pleadings, linked above, which really goes further and retraces the larger law and economics argument regarding how litigation costs influence settlement to zero in on a particular class of cases where he believes that the current system is most prone to litigation cost driven settlements. In this class of cases:

• The plaintiff’s internal costs of litigation are lowest, as in claims in which the plaintiff has little discoverable information in its possession, custody, or control.

• The plaintiff’s external costs of filing a frivolous suit are lowest, as in claims in which the plaintiff’s attorneys are unlikely to be repeat players in the same court or against the same insurer/payer.

• The defendant’s internal costs of litigation are highest, as in claims in which the defendant’s discovery costs are high and cannot be filtered or sequenced to minimize expenditures.

• The defendant’s external costs of settlement are lowest, as in claims in which there is little risk of reputational harm or copycat litigation and there is no insurance coverage.

. . . there is a relatively low risk of opportunistic pleading in most types of civil claims. Though full empirical analysis is beyond the scope of the current article, there is reason to believe that many of the most common forms of civil litigation – automobile torts, breach of contract cases, intellectual property disputes, etc.—inherently involve or can be made to involve relative parity in pretrial costs, or even disparity in favor of the defendant. Thus, stricter pleading standards across all claim types are unnecessary.

While is is not specific about identifying "high risk cases" he identifies anti-trust, class action securities fraud and class action consumer fraud types of cases against public corporations are examples of the kinds of cases he believes are high risk. He proposes as a solution the requirement that plaintiff's post a bond against defendant's attorneys fees if they wish to proceed with bare bones allegations, rather than a detailed factual description of the basis of their claim when they file suit.

In addition to my natural distrust of any economic theory that encourages a change in the law to favor large public corporations at the expense of a large group of injured ordinary person plaintiffs, I also think that Stancil's analysis understates the extent of the problem in more typical types of litigation.

While litigation costs are bigger in big cases than in small ones, litigation costs are larger relative to the amount in controversy in small cases than in big ones.

Also, Stancil, like many law and economics analysts, overestates the amount of certainty involved in the underlying merits of the case. In practice, predicting the outcome of a case even knowing all of the facts with certainty, is much more difficult than one would expect. Ambiguities of law or contract interpretation make the universe of potentially relevant facts larger, and can leverage modest disputes regarding the facts into big outcome differences.

My own suggestions are largely influenced by European civil law practice, and by criminal practice which conducts trials in very serious cases on a routine basis, with far less pre-trial discovery and motion practice.

So, what could be done procedurally to reduce civil litigation expenses?

1. Civil jury trials should be banned or procedurally discouraged outside the narrow subset of civil cases that account for a large share of cases that actually go to trial before civil juries. Primarily, these should consist of cases in which non-economic damages are available and eminent domain cases, although perhaps there are some exceptions I have failed to consider. The existing distinction between cases that were considered cases "at law" under historical English law, and those that were brought "in equity" under historical English law, has long ago outlived its usefulness. Notably, outside the United States, civil juries are virtually non-existent, even in England.

While the expense of calling a jury and preparing proposed jury instructions itself doesn't add all the much to the costs of litigation, the entire system of civil procedure is designed around the assumption the cases will be resolved by a jury, and this assumption causes the civil litigation to be conducted in a way that is very expensive because so many issues must go unresolved until a jury can hear the entire case. It is also essentially impossible to hear a case tried before a jury piecemeal.

These procedural consequences of a jury system are not necessary in a case headed to a trial before a judge in any case.

Also, the near absolute finality of a civil trial, after which no factual issues can be raised on appeal, encourages litigators to overprepare. Litigators preparing for a civil trial devote considerable expense to preparing to address every issue in the case that is not the subject of a stipulation, no matter how minor or how unlikely it is to be raised at trial, in order to guard against surprise. But, this can greatly drive up the costs associated with pre-trial preparation if the client can afford that level of preparation.

The narrowing of the scope of civil cases eligible for trial by jury in types of cases where this option is used very rarely, it is also possible to make changes as significant as rethinking courthouse architecture by allowing most courtrooms to be built without jury boxes.

2. At least in cases not on track to go to trial before a jury, a preliminary hearing should be held early in the case. This preliminary hearing would be analogous to a preliminary hearing in a criminal case, or to a first hearing in a court of first instance the civil law system, from which a first appeal on both issues of law and issue of fact is available. Each party might be given up to two hours to present preliminary evidence in the case.

At a preliminary hearing, a judge would preliminarily resolve as many issues of law and fact as possible, after receiving offers of proof that are undisputed, stipulations as to facts, key documents disclosed early on, and testimony (possibly by telephone) from a small number of key witnesses. One would have to make a detailed offer of proof in the hearing (or perhaps promptly thereafter) of additional evidence regarding a disputed fact, or show good cause based upon evidence discovered after the preliminary hearing, to have an opportunity to dispute those findings at trial.

While attorneys would have to devote time early on to preparing for a preliminary hearing and knowing their case, there is only so much one can do to prepare for a hearing that will last no more than four hours, and the ability to revisit issues resolved against a client at trial for good cause could help to discourage wasteful over preparation.

The goal of a preliminary hearing would be to resolve early on the kinds of cases that can be resolved in motions for summary judgment, and cases with simple evidentiary disputes that can be resolved with a minimum of evidentiary presentation. Preliminary hearings would also narrow the scope of cases that have some disputed issues of fact that require a great deal of evidence to resolve, to the greatest extent possible. Resolving disputed legal issues up front can also greatly narrow the scope of evidence that is relevant in a case.

The opportunity to resolve all or part of a case early on in a preliminary hearing would take a great deal of pressure to stretch the scope of motion to dismiss and summary judgment practice, because many of the close cases under motion practice could be resolved early on in a preliminary hearing, reducing the stakes in allowing a weak case to go forward.

The presence of a judge is also a factor that is more effective than almost anything else at constraining unreasonable litigation conduct by counsel for the parties. The prospect of an immediate negative judicial ruling or sanction from a judge discourages weak legal arguments or arguments based upon false inferences from the facts.

Another benefit of a preliminary hearing is that it would often give a judge a quick primer on the big picture of the case, which would make it easier for a judge to formulate a sensible case management plan for the case, which would assist in implementation of my next proposal.

Preliminary hearings are not unprecedented in civil litigation. Some version of a preliminary hearing is required under Colorado civil procedure in eviction actions, foreclosure cases, cases where an attachment (i.e. pre-trial asset seizure) is sought, and cases where a preliminary injunction is sought. Pre-trial relief requests that are often outcome determinative in practice, are particularly common in cases involving intellectual property, non-competition agreements, election cases, constitutional challenges to statutes, and publicly prosecuted securities fraud cases.

Cases brought in limited jurisdiction courts (up to $15,000 in Colorado) don't have preliminary hearings, but are resolved without any pre-trial motion practice or discovery unless specifically ordered by a judge which is the exception, and often are resolved in bench trials considerably shorter than a single full day. The judicial system attempt to resolve the vast majority of these cases within six months, and often does so in three or four months. Most are collection and eviction cases arising out of contracts in consumer transactions or transactions with small businesses.

3. At least in cases not on track to go to trial before a jury, it often makes sense to try a case piecemeal, considering issues that could resolve a case with less evidence first, before opening up evidence intensive issues.

For example, in most contract disputes, the cost of the litigation can often be significantly reduced by ruling prior to the conduct of substantial discovery in the case, on the question of whether or not a term of the contract whose meaning is disputed is ambiguous, which is a threshold to permitting additional testimony and evidence concerning its meaning to be considered, or not, which often greatly reduces the amount of evidence that is relevant and either resolves the suit or greatly narrows the issues in the case.

Similarly, in a contract case, if there is a serious dispute over whether a contract was entered into at all, it often makes sense to resolve the issue of the existence of the contract before litigating its meaning and the measure of damages in the case, or and even before allowing discovery on those issues.

Likewise, it often makes sense to resolve statute of limitations disputes, even if they involve greatly disputed issues of fact, before opening up discovery on other issues in the case.

4. Some asset discovery should be allowed in cases that survive a preliminary hearing. The cases that work best in the current litigation regime, individual personal injury cases, also happen to be cases in which the most important piece of asset discovery in those cases -- disclosure of insurance policy limits, takes place early in the case. While ability to pay is sometimes discussed in settlement negotiations, privacy considerations, strategic interests of high asset defendants, and concerns about the extent to which there is any remedy if a representation about assets is inaccurate, mean that asset discovery often takes place rather late in a case if it happens at all. But, realistic information about the ability of a defendant to pay a judgment if a plaintiff prevails not only encourages settlement, but also discourages plaintiffs from pursuing theories of recovery that can complicate a case without adding to a likely recovery. Currently, assets discovery is only allowed as a matter of right only after a judgment enters.